FERC "Encourage[s]" RTOs to Examine Energy Market Rule Changes (Greater Scarcity Pricing) to Provide Fuel Assurance

Capacity markets, Texas policymakers were told, provide a net benefit to customers because they eliminate unpredictable and volatile instances of excessive scarcity pricing in the energy market that customers cannot stomach, and therefore the billions provided in capacity subsidies result in lower total costs.

That narrative continues to erode with real-world experience from the Northeast RTOs with capacity markets, as, prompted by fuel availability issues from last winter, FERC has directed RTOs to report to the Commission on actions taken to address fuel assurance, with the Commission, "encourag[ing]," a review of energy market rules, including scarcity pricing.

FERC's directive included the following observation:

"With respect to potential reforms to energy and ancillary services markets, shortage pricing measures that accurately reflect the value to consumers of avoiding an involuntary curtailment could provide incentives for resources to pursue firmer fuel arrangements. Specifically, the potential to earn revenues to cover their costs and earn a return in a few high priced hours each year provides a strong incentive for resources to take steps (including firming their fuel arrangements) to ensure that they are available during those hours," FERC said.

FERC also adopted the reasoning championed by Texas energy-only market supporters -- that the risk of severe high prices will incent long-term contracting and other actions to support investment to avoid shortage conditions (though the implication apparent escapes FERC that such behavior makes an administrative capacity market superfluous).

"In addition, the risk of higher prices during peak demand hours could provide a strong incentive for load to take steps to hedge against that risk, including entering into bilateral arrangements to support additional infrastructure needed to ensure fuel availability," FERC said.

"[W]e encourage RTOs/ISOs to evaluate whether changes to energy market rules are necessary to ensure sufficient fuel cost recovery, thereby enhancing fuel assurance. We recognize that any solution involves a balance of interests, such as weighing the benefits of a particularly high level of fuel assurance with the associated costs, and encourage RTOs/ISOs to account for these trade-offs in their approaches to fuel assurance," FERC said.

FERC also noted that RTOs could adopt several alternative design changes to the capacity market to address fuel assurance, further belying the argument that capacity markets are a "settled" design that could quickly and easily be bolted onto the existing ERCOT market.

"With respect to potential reforms to capacity markets or resource adequacy constructs, RTOs/ISOs could pursue a range of options. On one end of the spectrum, RTOs/ISOs could reform their centralized capacity markets to provide greater price incentives for capacity resources to be available, and impose stiff penalties for failure to perform, to encourage capacity resources to enter into firmer fuel arrangements. As explained above, the Commission has already approved one such proposal in ISO-NE. On the other end of the spectrum, RTOs/ISOs could take a more administrative approach by reforming their capacity markets and/or resource adequacy mechanisms to specifically require that capacity resources have certain fuel arrangements in place to be eligible to provide resource adequacy," FERC noted.